World Bank: "New EU member states should focus on cutting public spending"

New member states of the European Union should focus on cutting public spending, as they can"t afford fiscal stimulus packages, Erika Jorgensen, an economist with the World Bank, said, while presenting a recent report on the last ten countries to join the European Union.

The analyst said that, with the exception of a few states such as Hungary - after its agreement with the IMF-, Slovakia, which has a stable situation, or Lithuania, where the situation of budget deficit should be under control, the other countries that recently joined the EU could experience a deterioration of their fiscal situation, according to the World Bank"s report. Subject to macroeconomic evolutions, governments in the region might be forced to cut their spending even further, "especially in the countries that built their 2009 budgets on what seems like optimistic macroeconomic forecasts", World Bank economists also said. They also added that this year, wage pressure in the region might decrease, even though to what extent will depend on the flexibility of the local labor markets.

The pressure on the budgets of new EU member states will increase this year, but in Romania"s case, the passing of the new budget could ease this stress, Erika Jorgensen further said. Whether the government achieves the 2% deficit target for 2009 will depend on the steps it will take in order to cut spending, she said.

The World Bank analyst added that the measures taken by the new Government to curb spending, could at least partly counter the deterioration of the budget"s balance, but the situation is difficult as the budget deficit reached 5.2% of the GDP in 2008.

The World Bank economist explained, that as economic slowdown sets in, 2009 will be harder than 2008. The unjustified pension increase, the cut of social contributions and the discretionary budget of local administrations, as well as other decisions of the former government, caused the deterioration of the budgetary balance, Jorgensen said.

On the issue of the various means that the World Bank has at its disposal to help troubled countries, the Bank"s officials explained that they are intended for investments in infrastructure, and others for supporting the state budgets. They also said that two thirds of the loans granted are intended mostly for investments, and not for covering public deficit. "A loan from the World Bank to cover the deficit requires a certain macroeconomic environment, which is ensured in most cases by an agreement between the country in question and the IMF", Erika Jorgensen explained.

Cătălin Păuna, chief-economist in the Bucharest office of the World Bank, explained that proactive economic policies are required to limit the effects of the crisis felt by citizens. Steps must be taken to rekindle the economic growth, by redirecting expenses towards investments and the development of social programs, to relieve the impact of the crisis on the population.